- Gold has received some support
- We expect this to be temporary and drivers to align to push prices lower
What has supported gold prices so far this year?
There are usually several reasons why someone would be interested to buy gold. 1) Inflation fears. 2) Fears about market and/or (geo) political uncertainty. 3) Low to negative real yields. 4) Expectations of strong demand for jewellery. 5) expectations of capital gains. 6) Expectations of a lower USD.
Since the start of December, inflation expectations – as derived from the US Treasury market – have increased. Higher inflation expectations are generally supportive for gold prices. What is even more important are the developments in US real yields.
Since the start of this year, the rise in 5-Y US real yields have come to a halt (see graph, inverse scale) and after the US employment report they have edged lower. The combination of higher inflation expectations, but lower real yields is a supportive combination for gold prices. Going forward we expect a more negative combination for gold prices. We expect inflation expectations to remain subdued, while US real yields to move higher.
Other drivers also to be negative
For 2014 we expect an environment of positive investor sentiment and relatively low market and/or (geo)political uncertainty. Moreover, we expect the USD to rally and the prospect of gold capital gains to be further adjusted downwards. In terms gold jewellery demand, we expect demand from India to be weak and demand from China to grow but strongly enough to compensate for the weak demand from India.
How did gold behave after the US employment report?
After the recent strong US data, the market was positioned for a strong US employment report. It fell far short of expectations and this resulted in an adjustment of interest rate expectations. Gold prices moved higher following the release, but the momentum has faded ever since. The market has realized that one weak US employment report – caused by weather related factors – will unlikely de-rail the Fed tapering of bond purchases. Moreover, the market remains convinced about the strength of the US economy. So do we. We keep our above consensus view on the US economy and above-consensus rate hikes by the Fed in 2015 (which will likely be anticipated later in 2014).